Tax reform on the brink of fiscal dominance: a political economy model

With an overindebted public-sector, Brazil has been on the brink of a fiscal dominance problem for quite a long time. The term has been usually associated to a situation in which monetary policy becomes subordinated to fiscal needs. This paper calls attention to broader implications of prolonged exposure to impending fiscal dominance. A highdebt environment may make perfectly reasonable fiscal-reform initiatives seem extremely risky. Without any room to absorb revenue losses, in a complex fiscalfederalism arrangement, the government is bound to recurrently see badly needed tax reform, which could lead to a much less distorting tax system, as an unaffordable adventure. The paper is structured in the following way. The next section presents stylized facts that have been underlying a whole decade of unsuccessful tax-reform attempts in Brazil. Section 3 shows how the combination of those facts creates very unfavorable conditions for the approval of the kind of tax reform the country needs. A simple political economy model is developed in section 4. Simulations based on the model are analyzed in sections 5 and 6. Concluding remarks are presented in the last section.tax reform, public debt, fiscal dominance, political economy, federalism, Brazil

Tax reform in Brazil:an evaluation at the crossroads

Tax reform has been a central issue of the Brazilian economic debate for at least a decade. But despite the supposedly reformist resolution of several governments, very little was in fact achieved. The idea of reforming the country’s indirect taxation system is, once again, in the forefront of the government’s agenda. The complexity of Brazil’s fiscal federalism has been often and rightly mentioned as a major difficulty to the advancement of the tax reform. This paper tries to look beyond fiscal federalism and focus on difficulties of a different kind, that have to do with the sheer magnitude of the reform and the uneven sectoral distribution of the indirect-tax burden in the country. After an initial section providing a brief historical and institutional background, section B discusses the various tax-reform attempts that took place since 1997, and draws useful insights for the analysis of the political economy of the taxreform deadlock. Sections C and D look into indirect taxation in Brazil, calling attention to challenges entailed by the scale of the intended reform and the uneven sectoral distribution of the tax burden. The political economy of the involved difficulties is discussed in section E. Concluding remarks are presented in section F.

New Frontiers of Social Investment: Learning from the InterCement Experience

This is a case study done by the Dom Cabral Foundation evaluating the presence of Camargo Corrêa Institute programs and InterCement company Camargo Corrêa Group, in the municipality of Pedro Leopoldo (MG)

Delaying Public Sector Reforms: Post-Stabilization Fiscal Strains in Brazil

Since the mid-1980s Brazil has experienced a period of great macroeconomic instability. Examining the evolution of the primary balance during these years, one identifies three markedly distinct periods: 1985 to 1989, 1990 to 1994, and 1995-96. The average primary surplus increased from 0. 6 percent of GDP in 1985-89, to 3. 1 percent in 1990-94, falling back to less than 0. 1 percent of GDP in 1995-96. The reduction in the operational deficit between 1985-89 and 1990-94 reached almost 5. 5 percent of GDP, with more than half of the improvement coming from falling interest payments. Between 1990-94 and 1995-96, the operational deficit widened by 4. 5 percent of GDP. Only less than a third of that variation may be attributed to rising interest payments. All the rest came from the vanishing primary surplus.

Fiscal impulse in the Brazilian economy

This paper develops an alternative indicator of fiscal policy which allows a more accurate picture of the underlying fiscal trend in the Brazilian economy over the recent period. This indicator corrects conventional fiscal-stance measures for the effects of theeconomic cycle, and yields a measure of the discretionary change in the budgetary position of the public-sector, known as the fiscal impulse. Section 2 briefly examines the evolution of traditional fiscal policy indicators over the recent period, detecting the bottom line of the changes in the fiscal stance. The details of the estimation of the fiscal impulse measure for the Brazilian economy are presented in Section 3. Section 4 concludes the paper with a reassessment of recent fiscal policy episodes, using the data generated in the previous section. The resulting fiscal-impulse measure indicates that, on average, the fiscal stance during 1989-96 was more expansionist than suggested by traditional fiscal policy indicators.

Public sector debt dynamics in Brazil

1. INTRODUCTION 2. POLICY MIX AND THE PUBLIC-SECTOR NET DEBT 3. SKELETONS IN THE CLOSET, PRIVATIZATION PROCEEDS AND SEIGNIORAGE 4. SIMULATING DEBT DYNAMICS 5. SENSITIVITY ANALYSIS 6. CONCLUDING REMARKS APPENDIX: THE SIMULATION MODEL